Inflation in the eurozone remained unexpectedly stubborn in April, holding steady at 2.2% rather than falling as markets had anticipated. Prices rose by 0.6% compared to March. While energy prices were down 3.5% year-over-year, this was offset by a significant rise in food costs. More troubling for the European Central Bank (ECB) was the increase in core inflation—which excludes volatile energy and food prices—from 2.4% to 2.7%. Services inflation also climbed, rising 3.9% compared to 3.5% in March.

With the eurozone unemployment rate holding at a record low of 6.2% in March, wage pressures—particularly in the services sector—may persist, complicating the ECB’s ability to cut interest rates beyond the expected move in June.

Tariffs Fuel Inflation: A European Problem

Inflationary pressures are also being driven by recent protectionist policies from the European Commission. Despite frequently criticizing U.S. tariffs as inflationary and economically harmful, Brussels continues to implement its own trade barriers. The latest moves include tightening the EU’s safeguard measures on certain steel products and imposing provisional anti-dumping duties on hot-rolled coil from Egypt, Japan, and Vietnam. These actions contribute to inflation by raising input costs for European industries.

A Call for Infrastructure, Not Industrial Vanity Projects

In a recent opinion piece published in Handelsblatt, the Hamburg Institute of International Economics (HWWI) criticized the industrial strategies of both the outgoing and incoming German governments. Their conclusion: Germany doesn’t need more costly mega-factories with uncertain futures—it needs a robust and sustainable improvement in infrastructure.

The HWWI pointed out that many of the high-profile projects announced in recent years—ranging from battery plants to chip fabs and green steel ventures—are now teetering on the edge of collapse. These large-scale factories often import nearly all of their raw materials, offering limited economic benefit to the domestic market. Moreover, they siphon off skilled labor from small and medium-sized enterprises (SMEs), weakening a crucial segment of the German economy.

Support for SMEs and the Construction Sector is Key

Real, lasting economic growth would be better achieved by investing in infrastructure and stimulating demand among SMEs and the construction industry. These sectors form the backbone of the German economy and would benefit directly from better roads, digital networks, and energy systems. Such an approach would not only reduce the need for corporate subsidies but also alleviate strain on the federal budget by boosting domestic demand.

Ultimately, prestige projects and heavily subsidized mega-factories do not drive sustainable growth. Instead, Germany should focus on creating the foundational conditions that enable its businesses—especially small and medium ones—to thrive. It is now up to the incoming government to avoid repeating the costly missteps of its predecessor.